Singapore Property Cooling Measures 2012 – Tempering genuine demand to achieve what aim?


In an attempt to moderate private residential property prices, the MAS has since 2009 implemented a series of restrictions on financial institutions and property owners. In Sept 09, interest absorption loans were removed and buyers were required to start paying mortgages on their uncompleted properties at the time of purchase. Feb 2010 saw the imposition of the Sellers Stamp Duty for properties sold within the first year of purchase and the lowering of the Loan-to-Value ratio for all loans disbursed by financial institutions. In August that year, the SSD was extended to properties sold within 3 years of purchase and LTV for second loans decreased to seventy from eighty percent.

Despite that, property prices continued on their upward trajectory and just five months later, the SSD was slapped on for transactions of up to four years and increased by more than five times to 16% for properties bought and sold within a year. LTV was reduced by a further ten percent and a loophole was plugged when the LTV for non individual purchasers was reduced to 50%. On the 8th December 2011, in a move hailed by many as the most drastic ever, the MAS imposed an Additional Buyer Stamp Duty (ABSD) of 10% on all foreign buyers, and 3% on all second property transactions for PRs and third property transactions for Singaporeans.

The PAP Government walks a tightrope on the issue of housing in Singapore. Its policy of allowing citizens to purchase flats at subsidized prices has resulted in a home ownership rate of 88.6% home ownership for the nation, one of the highest in the world. At the same time, an asset enhancement policy has seen the price of public housing, and consequently the net wealth of people, increase many folds over the past decades. The conundrum is this – a drop in house prices will see many owners in negative equity, but an unmoderated, runaway increase will see many citizens being priced out of the market, resulting in a host of unhealthy social issues and unhappiness on the ground. Neither situation is desirable, and timely intervention is required to keep market forces in check.

This reality is made more tricky by the appointment of Ben Bernake as the Chairman of the US Federal Reserve. Also known as ‘Helicopter Ben’ after he swore by Nobel Prize winning economist Milton Friedman’s ideology that deflation and economic anemia could be starved off by printing and dropping more money onto the population by a helicopter, he was the responsible for the series of Quantitative Easing measures. By purchasing Government bonds from institutions, corporations and pension funds, the Fed is able to increase demand for bonds, thereby reducing their yield and hence making savings less attractive and spending more so. At the same time, the Fed hopes that the new found ‘wealth’ of these institutions will filter down to masses, reduce the unemployment rate, boost overall confidence, and eventually for the people to spend their way out of a recession. Unfortunately, with the US economy still spluttering along and the perpetually weakening US dollar, many institutions and individuals remain unconvinced and cynical about investing their new found wealth in the United States. They flee the continent with money still warm from the printing presses in search of more attractive yields and safer harbors. The woes of the EU ensured that a sizable portion of this ‘hot money’ ended up in Asia and our shores. Money flowing into our economy inevitably ended up in the property market.

As punitive as it might seem, the ABSD that was conjured up in Dec 2011 to contain the effects of QE2 barely made a dent in buying interest and all it had to show for after 9 months was the additional $500 million in the Government’s coffers. After a period of muted activity, foreigners have returned to the market with a vengeance. On 1st October 2012, URA announced flash estimates for the residential property index. The index rose from 206.9 at the end of the Q2 2012 to 208 at the end of Q3. This represented an increase of 0.5%, a tad higher than the previous 0.4% increase in Q2. Despite transaction volumes falling by 7.3%, which could be attributed to the ‘Hungry Ghost Month’, non landed resale home prices increased by 3.2% to reach $1156. This situation will be exacerbated in time to come, with the Fed announcing on 14th Sept that an additional 40 billion usd will be ‘printed’ every month and injected into the system for as long as it is required to give the American economy a boost, effectively kickstarting QE3.

On 6th October 2012, the Monetary Authority of Singapore (MAS) announced the following cooling measures for the property market.

  1. The absolute limit on all residential loans tenures will be 35 years.
  2. Residential loan tenures exceeding 30 years or extending beyond the borrower’s 65th birthday will be subjected with significantly tighter Loan-to-value limits. The LTVs are 40% for a buyer with no outstanding loan and 60% for a buyer with an existing home loan.
  3. LTVs for non-individuals will be reduced from 50% to 40%.

This set of new regulations comes as a radical departure from the norm. All previous editions of the cooling measures have tried to address and arrest the issue of speculative demand driving up the market. The implementation of SSD prevented punters from flipping properties for a profit indiscriminately. Constant downward revision of LTVs for subsequent purchases and non-individuals reduced the purchasing power of property investors and at the same time give first time (genuine) owners a slight advantage in terms of financing assistance. The ABSD took that to a higher level and made a robust attempt to contain foreign money inflow.

A LTV penalty on loans more than 30 years in tenure will have an immediate impact on all homeowners, be it a first timer buying for his or her own stay and to start a family, or a seasoned property investor looking for greater yields and capital appreciation. Imagine a scenario where a couple aged 25 are looking to buy their first property. While previously they could afford extend the loan to 35 or even 40 years, they now have to contend with a 30 year loan should they want to borrow up to 80% of the purchase price. Their options now look like this.

For a $700, 000 purchase at interest rates of 1.5%.

Before 6 October 2012

  1. 40 year loan, 80% LTV. Monthly $1552 Cash upfront $140 000

After 6 October 2012

  1. 30 year loan, 80% LTV. Monthly $1932 Cash upfront $140 000
  2. 35 year loan, 60% LTV. Monthly $1286 Cash upfront $280 000

With the newest implementation, assuming the buyers can only afford a 20% downpayment on their property, monthly installments grow by 25% with a ten year reduction in loan tenure. The alternative would be to stump up another 20% of the purchase price and taking out a loan for the remaining 60%, hence reducing the monthly repayment. Both would be seen as more prudent financing for a property, but neither options would have genuine home buyers jumping with joy. The end result is a reduction in nett demand.

The move is unprecedented because it is the first time MAS regulations are affecting initial home owners. I am not advocating incriminate extension of loan period with blatant disregard for financial prudence. I am not saying that a 40 year loan tenure is necessarily good. The point of contention here is that the MAS, via it’s policy, decided not to spare this group of buyers from the measures when they could have easily inserted their usual caveat to exclude first time home owners. Much has been said about HOW the measures will affect the property market but few have tried to delve into the WHY (other than to counter QE3), and the justification for the MAS to temper with genuine demand. If we look from that direction, we can extract a few inferences.

  1. The MAS has lost the plot – they have implemented this policy without proper considerations of all factors and have overlooked this segment of the market.
  2. The government has given up on curtailing the influx of foreign investments. It is almost as if they throw their hands up in the air and say we give up, we cannot control foreigners coming in, they are going to outspend us no matter what we do and it is better for the economy as a whole to keep foreign interest strong rather than have them withdraw. But on the other hand we cannot let prices run to an obscene level so let us work on all the other segments. And if first timers are a contributing factor to the price increase, we will rein them in – to hell with genuine demand.
  3. A property bubble is forming. With the information and data they have, they see that Singaporeans are over-stretching themselves and committing to too much debt. The low interest rate environment have made many complacent with their purchases. They see that five sets of measures to curtail speculative activity have only achieved limited success and with the situation growing more dire day by day, the authorities have decided to apply more broad based policies – in part to dampen demand, and in part to protect against an ugly outcome if the economy decides to go belly up or when there is an exodus of hot money from our shores. The noble intention really is to prevent buyers caught up in the frenzy right now from being left standing naked after the tide recedes.

Personally I think it is a combination of all three. What’s your stand?

Dive, snowboard and have moved house five times in the last ten years. Miraculously filled up every single page in my passport before it expired. Manage risk for a living.
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12 thoughts on “Singapore Property Cooling Measures 2012 – Tempering genuine demand to achieve what aim?”

  1. Agreed partly. For those first time buyer, yes, the effect is tremendous yet it will not be long. I am in opinion that the government movement would seriously cool the whole market down this time, together with huge influx of new flats eventually benefiting all peoples. 700,000 will become let’s say, 650,000? Am I too naive to think so?

  2. Hi Teng How, MAS did come out to say that about half of the buyers have been opting for long tenure loans so my take is that this set of seemingly docile measures will have more bite than most imagine. The huge influx of new flats in 2013/14 would definitely have a significant effect as well. I think at this moment, upside is capped while downside is unknown, and it will take a very brave (or very rich) investor to commit to purchases now.

  3. Agree with you it is all 3 factors – esp. no. 3.
    With 50% of buyers doing this, it will get very ugly when interest rate eventually rises or global economy dives. At least if they start out with 30 year loan, if things go bad, there is still the option of stretching out the loan period.

    • Thanks for the vote of confidence Jeff.

      I remembered my parents telling me before I bought my first property that I should always go for the longest possible loan tenure initially. That is because the option of reducing the loan tenure would always be easier to secure than increasing the years to repayment. Implicit in this advice is the trust that I have done my sums and am acting prudently with regards to repayment ability. The irony is not lost on me that we are now reducing and limiting tenure to guard against for loan defaults in the future.

      In your example above and with the current regulations, if things go bad, few would be able to stretch out the tenure any further because any period more than 30 (or beyond 65) years would incur a lower LTV and a cash injection. That is hardly an option for a distressed owner.

  4. Hi Jon

    First time reader here and I like what you have written. It is rare to see good financial blogs in Singapore so appreciate what you are doing.

    I believe the biggest driver of property prices is population growth. As long as the number keeps going up, there is very little the government can do to stem price increase.


    • Thanks Aaron, you just made our day here at bigfatpurse!

      As we all know, price is affected by two elements – demand and supply.

      The supply side of the equation is pretty straight forward for us to grasp. As of this very moment, Channel News Asia is reporting that 26800 HDB apartments and 22400 non landed private housing units will be completed in 2014. This is a significant increase from the 11300 and 12500 respectively for 2012. There is no question at all that supply will increase, and all things being equal, price will decrease.

      It is the demand side that has everyone scratching their heads. As you have rightly pointed out, population growth is the primary driver. However population growth is also the most elusive piece of puzzle in the whole picture. No one knows for sure how much more growth in immigrants and foreign workforce will the government allow in the near future (If you know someone who does, send him my way and I will buy him a beer!). Without specific figures, any attempt at predicting prices of residential properties will be at best learned approximation and at worst flippant guesswork.

  5. Hi Jon,

    Now is the 7th Cooling Measure! Look like the government have to make it more painful for people to own properties.

    The supply side seems to have no impact to the price at the moment. Everyone is asking for higher and higher price. Even for the same unit, where the previous asking price is not met, the price will still continue to adjust upwards every few months. With the secondary market remain so strong, there is no reason for the developers to lower their prices too. And since new HDBs are suppose to “mark at discount” to market price, it will naturally shift upwards too.

    The way I see it, the demand has no impact at all… as long as the interest remain low, and the rental market is still buoyant, the property market will continue to move upwards. Owners can rent out their properties while waiting for someone who is willing to pay the price. Even if not rent out, the low interest rate means that the loan is still easily servicable. We will need to wait for a big hammer, like the Asian Crisis, Financial Crisis to break the back. All these measures only slow down the momentum.

    • Hi Prop Hunter-wnb

      As Jim Rogers would like to say: Where demand and supply meet is where prices hang out. Demand and supply is the primary overriding determinant of housing prices. Everything else, low interest rates, rental yield, ample liquidity are but secondary factors affecting demand and/or supply.

      The fact that people are still buying is just a demonstration of irrationality in its highest form. With 7 rounds of measures, does anyone doubt the Government’s resolve in wanting to cap property price rises?

      The rental market is far from buoyant. I have been searching for a private apartment to rent in the east for the past few months, and have seen easily 30 units. Every single one of them is empty. Every. Single. One. And some of them have been vacant for up to five months. This is far from the situation some years back where the downtime is minimal and tenants are a plenty. URA figures show a 0.2% increase in vacancy rates and I think it is set to increase further.

      And yes. totally agree. we need a big one to happen. Else all measures will just slow down the momentum.

  6. Hi Jon,

    Interestingly, i had a different experience. Just few months ago, I wanted to rent a place near my kid Pri Sch, but the units are grabbing up fast from the market, within a week upon listing. As we dont have the time to view and decided against the inconvenience of shifting, at the end, we decided to stay put as my other son’s Childcare is near our present place.

  7. Recently me and my husband who are looking to uograde our hdb have been looking at private property and EC. They are launching so many EC nowadays. I am not sure why but I have a suspicion that the government is trying to pocket money from the EC market while they can. Compare a 3brm EC in punggol costing $800k and a 3brm mass market condo near mrt in say Pasir Ris costing 900psf ( works out the private condo will cost $100k more) . Which would you buy if you could afford both? It turns out that the EC is more “affordable” since I can take up to 80% loan,but the condo is unaffordable since I can only loan 50%. Who on earth has $500k in cash+cpf+investments for this kind of condo downpayment?!!!

    I don’t understand how making people buy EC rather than mass market private condo is an effective cooling measure.


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